Markets & Finance

Symantec Shares Slide amid Sales Slump

January 16, 2007

Along with weakening revenues, the security software company is also bedeviled by higher costs

Symantec (SYMC) has struggled of late as it tries to rein in costs and bolster sales growth. But the security software company continues to disappoint investors, with the latest gloomy news coming on Jan. 16. The company said in a press release that revenue for the three month period ended in late December will be down by at least 14% from the same period last year. And it expects sales to fall further in the March quarter.

As CEO John Thompson fights off tough rivals like McAfee (MFE) and Microsoft (MSFT), he's been trying to strengthen Symantec by cross selling its security software alongside data back-up services. While some in the market praise that effort, Symantec's data center management business disappointed in recent months.

Symantec had said earlier that its revenue for the quarter would amount to between $1.315 billion and $1.345 billion. Now the company expects revenue will likely amount to between $1.29 billion and $1.31 billion. During the quarter ending in March, revenue will head even lower to between $1.24 billion and $1.27 billion.

"With revenue coming in below plan and spending remaining at a high pace, pro forma EPS expectations for the next few quarters will not be something to write home about," Friedman, Billings, Ramsey & Co. research analyst Daniel Ives said in a note Jan. 16. "Symantec unfortunately continues to be a major work in progress, as indicated by its very weak outlook and disappointing results."

Some of Thompson's spending is related to upgrades. For example, he had higher than expected costs related to his company's new Enterprise Resource Planning system, which will integrate and unify data. He thinks his earnings per share during the December quarter will range between 10 to 11 cents, down from an earlier forecast of 14 to 15 cents. For the whole year ended in March, earnings will amount to between 36 and 39 cents per share.

The news disappointed investors, who sent the stock price down 12.5%, to $17.93 per share, in afternoon trading on the Nasdaq Jan. 16. Some analysts ratched down forecasts. Standard & Poor's Corp.'s Jim Yin, for example, downgraded his earnings forecast on Symantec for fiscal year 2007, bringing a 12-month target price to $17 from $19. FBR's Ives slashed his fiscal year 2007 and 2008 estimates and his price target to $18 from $19 per share.

Time will tell whether Thompson's strategy pays off long-term. "By offering backup and storage solutions, Symantec is more likely to be considered as a strategic vendor, enhancing the company's ability to cross-sell products," Morningstar analyst Rick Summer said in a research note Dec. 18, explaining why he thought Symantec's stock had fair value at $23.00 per share. "We expect the security software industry to continue consolidating and single-product companies (such as Check Point Software [CHKP]) to become increasingly irrelevant."

(FBR acts as a market maker for Symantec securities, but Ives certifies that his views are accurate and unrelated to his compensation. S&P, like BusinessWeek.com, is owned by The McGraw-Hill Companies.)